High-growth stocks have been coming under fire lately. After an explosive rally off the Q4 2018 lows, many of these names are starting to rollover. Like its peers, Shopify (NASDAQ:SHOP) has been getting hit too. Unlike its peers though, SHOP stock has been holding up better than most.
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Lately, high-growth stocks have again come under fire. That much has been highlighted in InvestorPlace’s Stock Market Today column.
Looking at a number of well-known high-growth stocks, Shopify is the third best when it comes to how far the stock is off its current 52-week high. SHOP stock is currently down about 25.5% from its 52-week high of $409.61. However, that doesn’t tell the whole story.
Roku (NASDAQ:ROKU) is currently down almost 24%, but was down more than 40% from its highs, before embarking on a ~40% rebound over the last few weeks. In short, ROKU has been all over the map.
The other is Veeva Systems (NASDAQ:VEEV), which is down “just” 19% from its highs and hasn’t been as erratic as Roku. There are numerous names down more than 30%, with some approaching the down-40% mark.
Secular Trend Aids Shopify Stock
SHOP stock is a tough one for two main reasons. The first, it’s a game-changing e-commerce platform. The other is its valuation, as it’s priced exactly as one would expect a game-changing e-commerce platform would be.
A look at e-commerce sales shows that the secular trend is in Shopify’s favor. It’s why traditional retail has been turned upside down, even amid a decade of economic expansion. Still, e-commerce is just a fraction of overall retail sales. So long as consumers want convenience, online sales should continue to grow.
Amazon (NASDAQ:AMZN) is the unquestioned leader of this movement. However, it’s not known for being the friendliest player in town. Its advertising business has created a clash with its e-commerce listings, where even the largest brands can’t do online sales in the way they want.
That’s led to Shopify having an opportunity. By switching to Shopify, brands can control the entire experience for its customers. That allows them to gather data, tracking and behaviors of its customers, as well as market to them in the way they want. These brands — ranging from mom-knitted hats and gloves to the biggest consumer products companies in the world — are seeing the benefits of migrating to a platform like Shopify.
Will Shopify dethrone AMZN? Not anytime soon. But that doesn’t mean it’s not changing the e-commerce game. Its warehousing efforts, Shopify Pay, shipping and returns, and other initiatives are all helping fuel the move to its platform.
With a $34 billion market cap (and a peak of ~$45 billion), SHOP stock isn’t exactly flying under the radar. Further, trading at ~22 times this year’s revenue after a 25% correction isn’t exactly cheap. On the plus side, growth remains strong, with estimates for 44% sales growth this year and 35% growth in 2020.
Trading SHOP Stock
Some will read the preceding analysis and feel that it’s a little light when it comes to valuation. In truth, it is. But SHOP stock carries a high valuation. Whether that’s 16x sales or 26x sales, that doesn’t change. There’s no sense in extrapolating a dozen different metrics that all say the same thing.
When investing in high-growth stocks, that’s just part of the territory. The long-term opportunity vs. current valuation is a constant mental battle for investors. For short- and intermediate-term considerations, the charts can be the deciding factor.
From its December low, Shopify stock rallied about 250% to its highs in August. The 50-day moving average had been a support guide amid the rally. In September, the 50-day broke as support and in October, it was resistance.
This marks a notable change in tune and emphasizes the larger correction phase we’re in. High-growth stocks need to consolidate these massive gains. Even down big, SHOP stock is still up 130% year-over-year.
For now, the 61.8% retracement is buoying SHOP stock. It could be good for a short-term bounce up to the $320 to $330 area. However, I wouldn’t be surprised if this one breaks its September low of $286.07 and retreats toward the 200-day moving average and 50% retracement.
This seems like a reasonable area for long-term investors who like Shopify to consider initiating a long position.
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